Wealth transfer to multiple heirs – ensuring fairness and minimising disputes

Losing a family member is an event that brings the other members together to find solace in each other and reflect on times passed. Unfortunately it can also be a time where disputes over assets, responsibilities and wealth management can rise to the surface. At a time when emotions are likely to be already running high, these kinds of conflicts can cause long-term fractures that are hard to fix. One common ingredient in these situations is the lack of a clear and comprehensive succession plan.

For wealthy families, especially those with assets located all over the world and multiple potential heirs, the complexity of these disputes is magnified. There are many high-profile examples of conflicts resulting in protracted legal battles. If there is a family business involved, disagreements over succession risk damaging more than just family relationships. They could undermine management and have a negative impact on profits and jobs.

This is a risk that many wealthy families are opening themselves up to. Research by Campden Research and UBS Bank shows that just 32% of wealthy global families¹ have a formal succession plan in place. Put simply, this is a mistake. Effective succession planning becomes much harder if it is not addressed until after a family member passes away.

Preventing disputes

There are several factors that can fuel disputes over inheritance and succession. Firstly, uncertainty creates a vacuum into which people can begin to project their own preferences. Two family members can both simultaneously believe that they deserve to run the company and that everyone else knows this is the case without the issue having ever been dealt with formally. Succession planning is often primarily concerned with clarifying the roles and responsibilities for a family business as well as what is going to happen to assets.

Secondly, sometimes the plans themselves ignite conflict. In complex family arrangements with multiple heirs, the risk of one being unfairly favoured over the others is one that needs to be effectively managed. It is often not easy to achieve complete fairness when there is a large, complex inheritance or limited business responsibilities to share out.

We are in a period of huge intergenerational transfers of wealth, unprecedented in scope and scale. Yet wealth remains a largely unspoken topic for wealthy families, meaning that the loss of a family member is often the time that heirs really see the complexity of the estate for the first time. And with ultra-high-net-worth families often having estates that are majority illiquid assets, it is rarely a case of simply dividing up what is left and moving on.

Ensuring equalisation

Fairness and equalisation are hugely important when it comes to wealth transfer and succession planning. They are often, however, extremely difficult to achieve. Proactivity is the key to preventing disputes before they occur and ensuring that the lines of communication are open and the difficult conversations have been had before the head of the family passes away.

Just like families themselves, the details of every individual succession plan will be different. But there are a few commonalities that all effective plans share.

Clarification of roles
It is essential to plan ahead and ensure each member of the family knows where they fit into the plan. Not only does this help to reduce conflict but it gives individuals time to prepare for their new responsibilities. Many family businesses have family members operating as owners as well as managers, and the succession plan may need to bring in more family members or establish a more formalised structure. These kinds of changes take time to implement successfully.

Estate equalisation
The last thing that any family head would want to leave behind is a legacy of conflict, so dividing assets equitably should be a priority. There are certain caveats though, and in some situations ‘fair’ might not mean ‘equal’. Decisions need to be made using a broad range of considerations and factors, such as family dynamics, financial needs of younger family members, business climate and the current tax regimes. Those that are part of a blended stepfamily can quickly find that equalisation becomes very complex. In situations with multiple beneficiaries and complex family dynamics, life insurance is a planning structure that can ensure protection as well as flexibility.

Liquidity
Liquidity is an important mechanism for achieving equalisation. When there is a high cash benefit on death, different heirs are not left with illiquid assets that they need to sell while others benefit from assets that can be utilised straight away. For many families the majority of their assets will not be liquid and the process for creating more liquidity can be long-term and complex. Solutions like Swiss Life Generations are specifically designed to combine wealth insurance with liquidity creation to enable family heads to secure the future of their loved ones without having to break up businesses or sell assets.

A comprehensive approach

A comprehensive approach, communicated clearly to all stakeholders, can help to promote harmony and goodwill at a difficult time. It also ensures all members of the family are treated equally and any vulnerable members are protected.

To ensure complete fairness and, importantly, the perception of fairness, wealth planning tools must enable estate equalisation on an ongoing basis and have the flexibility to adapt as family wealth grows and changes.

Sources:

[1]  https://www.ft.com/content/224c069e-f007-11e9-a55a-30afa498db1b